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An iPhone generates approximately $650 in revenue for Apple. This figure has remained fairly steady over time. Using deduction from overall margins, it’s possible to estimate the gross margin on the product to be around 55%.

That means that the cost of goods sold (COGS) for the iPhone is about $293. Is that a lot? Where does that money go? What else does it tell us about how the company operates?

To find out we need to understand the cost structure of phone building.

Typically there are four main categories of costs for a phone:

Bill of materials (BOM). This represents the cost of the components that go into the device. These are paid to suppliers.

Transportation/warehousing. This is the cost to transport and store the product before sale. This is paid to shipping companies and warehousing.

Manufacturing cost (including labor). This is paid to contract manufacturers.

Warranty expense. This is paid back to customers for returned product that can no longer be sold.

We can estimate a device’s BOM through a teardown analysis and there are firms that do this. Usually this offers enough competitive insight into the cost structure and hence gross margin because the other items are predictable in that they do not vary greatly from product to product.

In the case of the iPhone the BOM has been fairly steady around $200 for a new model. That leaves quite a big gap to the overall COGS of $293.

Could transportation, manufacturing and warranty costs really add up to $90 for an iPhone?

The manufacturing costs are not usually discussed in detail openly because the processes used are secret. However, thanks to and ABC Nightline report, some clues have emerged about how iPhones are built and, although incomplete, they offer some interesting bounds.

One data point recently published is that the iPhone takes 24 hours to be built. Of that 6 to 8 hours is spent in “burn-in” to install and test the software and components automatically. This leaves about 17 hours unaccounted for in the throughput time. Could this time be spent in labor intensive operations? In the ABC report the wage of workers on the line is given as $1.78/hr[4]. 17 hours of labor input would imply $30 labor cost per iPhone. That seems a lot higher than the industry (i.e. iSupply’s estimate is $8 for manufacturing cost.) This is an upper bound. Obviously, those 17 hours could be spent in automated operations which were not shown or simply sitting idle, waiting for a process to begin.

Is there another way we can check this?

There is. The ABC report also mentioned that there were 141 (presumably labor) work steps in the production for an iPhone. If we knew the time each step took we could obtain another estimate. For example, if each step in the human assembly process took 3 minutes[2] then human hands will touch the iPhone for 423 minutes or about 7 hours. This would imply a labor cost for an iPhone of about $12.5. If each step was longer or shorter, the cost would vary accordingly.

Unfortunately we can’t be sure of the exact cost. However, these recent clues offer some interesting bounds and observations[3]:

Manufacturing costs for the iPhone are likely to be much higher than comparable devices. This is partly because of the design of the product and partly because of the quality testing needed.

Those costs are likely to range between $12.5 and $30 per unit.

The iPhone manufacturing costs are likely to be twice or three times the average.

Labor costs are still a small part of the overall cost structure at between 2% and 5% of sales price.

The high level (141 steps) of human interaction in the process could be automated however, the fact that it isn’t implies that the cost of automation would be higher and the flexibility of the automated process would be lower. It’s much more likely that the process is a mixture of labor and robot intensive sub-processes.

Even if we assume a $30 manufacturing cost, there is still $60 that needs to be allocated to transportation and warranty expense. These require sanity checks as well.

—

Notes:

Note that R&D (engineering and development) and Sales, General and Administrative (e.g. Marketing) costs are not part of this cost structure. They are considered fixed costs and are not allocated to individual units of production.

Note that during the ABC video there was mention of automated instructions being broadcast to the line. This implies that each worker is working on a “clock cycle” and each work stage is timed to take an equal amount of time. This clock cycle time is crucial in understanding the cost structure. One further clue to this cycle time comes from the iPad output rate per worker. This was mentioned in the slide show to be up to 6,000 units per day. Assuming 10 hours of working time per day means 600 units per hour or 10 per minute. This seems extremely high as the worker would have to handle the product for only six seconds. [UPDATE: Apple clarified this point: “In manufacturing parlance this is called deburring. Her line processes 3,000 units per shift, with two shifts per day for a total of 6,000. A single operator at Ms. Zhou’s station would deburr 3,000 iPads in a shift”]

As this post shows the amount of information that can be obtained from observing operations can be significant and lead to competitor advantage. It should be clear why this is not something done willingly.

UPDATE: In a statement Foxconn clarified wages as “We have over 75 percent of the employees in the category of earning at least 2,200 RMB ($349/month) basic compensation standard. That means they are earning 13.75 RMB ($2.18) per hour”.

No wonder Apple is truly on fire lately as far as the business world is concerned. The sheer amount of profit that is built into its biggest selling product for the price point just blows my mind. Anything bigger and you’d think that the product they were selling is some sort of sham.

Anonymous

I want to know why the iPhone is more expensive than the iPad and why it’s so much more expensive than the iPod Touch (it’s not that different).

I’m not sure your feature disparity list is that significant. I think the 4S should be compared to the iPad 3 (2S?) – the 4S just happened to get certain things first. The iPod Touch 4 already has IPS. The iPhone may always have a somewhat better camera than pad/pod but it’s not gonna cost that much more. Cellular processors is a valid point as is antenna. Are you saying the iPhone has a bigger battery than the iPod? Well maybe, but then the iPad has a bigger battery than the iPhone. More licensing requirements is valid too I suppose but I doubt it all adds to much. By ISPs I assume you mean carriers – that’s irrelevent because you can buy all the devices off-contract…which is when the exorbitance of the iPhone is apparent. I really don’t know about your last three items.

I think Horace’s comment about it solving certain problems is more pertinent but I am still not convinced it’s worth it. You can argue that the 4S doubles as a decent ultra slim camera for example…

Anonymous

I’m not sure your feature disparity list is that significant. I think the 4S should be compared to the iPad 3 (2S?) – the 4S just happened to get certain things first. The iPod Touch 4 already has IPS. The iPhone may always have a somewhat better camera than pad/pod but it’s not gonna cost that much more. Cellular processors is a valid point as is antenna. Are you saying the iPhone has a bigger battery than the iPod? Well maybe, but then the iPad has a bigger battery than the iPhone. More licensing requirements is valid too I suppose but I doubt it all adds to much. By ISPs I assume you mean carriers – that’s irrelevent because you can buy all the devices off-contract…which is when the exorbitance of the iPhone is apparent. I really don’t know about your last three items.

I think Horace’s comment about it solving certain problems is more pertinent but I am still not convinced it’s worth it. You can argue that the 4S doubles as a decent ultra slim camera for example…

Tatil

Well, if you are going to say that cost and price do not have a linear relationship, you’ll get no argument from me. 🙂

I have not checked an iPod touch recently, but I am fairly certain iPod Touch 4 (2010 model) does not have IPS screen. Retina yes, but not IPS. (If the colors shift when you tilt the screen, it is not IPS).

Anonymous

The Touch has a Retina Display, but it’s not IPS, it’s TN.

Anonymous

I wonder if licensing fees make up the difference. For example, are ARM licensing costs including in the iSuppli teardown BOM? I assume so, but if not, that could be another category that could get you closer to the gross margin costs.

I can’t find the reference but I think someone estimated the ARM fees at being around $.30 a piece. Not a huge deal.

But if Apple has licenses in place with folks like Microsoft or Qualcomm, those fees could be much higher.

Anonymous

You would think that a lot of those licensing fees would be buried in supplier costs through exhaustion (e.g., Qualcomm baseband chipsets). But clearly whatever Apple had to license from Nokia was not.

IP is messy. I’d guess IP costs show up all over the place.

Peter

That’s exactly what Apple is currently arguing in court. Qualcomm allegedly has a cross-license agreement with Motorola, but Apple was still sued by Motorola.

You did an interesting analysis of capital expenditures a few months ago that I recall led to a belief that Apple “owns” the manufacturing equipment used in iPhone production. Would the cost of that equipment explain some of the difference between the BOM and COGS?

But if Apple had utterly arms-length deals with FoxConn, FoxConn would up the manufacturing cost per unit to cover the very iPhone-specific assembly line machinery. Designing, acquiring, installing and testing, then operating and depreciating the manufacturing gear would be billed right back to Apple as a cost item.

That’s hypothetically. In the real world, some of those costs seem to be on Apple’s R&D and CapEx. But some are still costs.

Expanding on your footnote 2 in a calculation whereby the workers would on average have 6 seconds to touch the product, I would say your average time could be misleading as each step need not be identical and the workers can be applied to tasks in a non-uniform manner.

During many stages of assembly, some tasks likely take sub-second timing and others take 15 to 35 seconds to accomplish. You could have a few workers with easily 18 (six wide, three deep) iPads sitting in front of them and they could place small components into the frame rapidly and then have those 18 iPads with loose components be sent to 18 workers where they spend one to two minutes securing things with screws. Even better would be robots and machinery to automate these steps and one human can supervise the robotic measurement tools to ensure proper task performance.

It’s conceivable that many steps could be so rapid and automated that overall, the average 6 second touch would be very achievable. Considering that the efficiencies of making millions and millions of these means that even minuscule improvements will yield big returns once the process is streamlined.

Stackjd

Horace,

You are using 1.73 USD as the wage of workers but this is what they see in their pocket. In reality, Apple would be paying much more than this per hour of labor as Foxconn would have their markup as well as taxes, withholdings and other benefits that might be a legal obligation. Cost to company for the 1.73 usd/hr that the laborer sees could actually be double that.

Somewhere in there (whether paid directly by Apple or bundled into Foxconn’s contract rate, or some of each) is amortization of all the equipment, etc. And Foxconn isn’t just marking up labor, it’s building, heating, lighting and maintaining manufacturing “citiies”.

Accounting rules require that things like depreciation on manufacturing equipment be applied to the cost of goods (and the value of inventory), not SG&A.Once upon a time a rule of thumb was to take direct wages and double it to get actual costs, but that’s pretty imprecise and I’m sure others can provide a more accurate multiplier.

Horace, the BOM varies based on how much memory is in the phone. It’s $254 for the 64 GB model, for example. So don’t you need to replicate the mix of models reflected in the average selling price in the BOM figure you use? Also, I seem to recall that the average selling price includes some accessories sold with the phone like docks, extra chargers etc.

UPDATE: Yeah, in Apple 10-Q it says the revenue listed on the iPhone line “Includes revenue from sales of iPhone, iPhone services, and Apple-branded and third-party iPhone accessories.” What are iPhone service revenues?

I guess what I’m saying is I don’t think it’s quite the mismatch that you are digging into here (“Could transportation, manufacturing and warranty costs really add up to $90 for an iPhone?”). The BOM figure you used is understated and the ASP includes ancillary sales of accessories and services that aren’t even included in the BOM.

Taking 24 hours to build a product doesn’t mean it has 24 hours of direct labor in it.

The vast majority of that time the product is either moving between workstations, or is in a holding/warehousing area awaiting the next step. I would be very surprised if the iPhone had more than a couple of hours of direct labor in it (modern automobiles have less than 20 assembly labor hours per unit.)

Even the very leanest production line requires a certain amount of inventory and “work in process.” A 24-hour build-time implies deliveries to the assembly facility at least once (and probably two or three times) per day.

Most of the assembly steps in an iPhone probably involve the worker handling it for far less than a minute.

When coming up with assembly cost estimates, its worth keeping in mind the concept of a “fully burdened labor cost”: In other words, Foxconn has a lot of other costs beyond simply worker pay. They have to pay the cost of training and meetings for employees. They have to pay the depreciation on the facility and any machinery. They have to pay for supervision, to keep the lights on, and pay the guards outside the plant. They also have to pay at least some level of employee benefits (even if its just the cost of a nurse and bandaids at the First Aid center.) Its typical in the US for a “fully burdened labor cost” to be between two and three times the employees – i.e.. a worker making $25/hr will have a burdened-cost of $75/hr. That is the way cost-accountants and job-cost estimators price manufacturing labor.

Apple provides software upgrades free of charge for iPhones, iPads etc. It has to take an accounting charge for those upgrades, at time of sale, which reduces the gross margin.

Alan

I think I remember this being discussed a couple quarters ago. If I recall correctly, it was on the order of $15 per phone that was being held back in order to cover the enhanced functionality that OS upgrades would bring. I thought it was being held in a manner similar to a warranty cost.

r.d

what about the ipad. It is not just a big ipod touch.
it takes 5 days and 325 sets of hands to make an iPad.

Foxconn employees make $1.78 and hour. How much does Apple pay Foxconn for the same hour and how much does Foxconn pocket on each device sold?

Anonymous

I am appalled by the labor intensity of the operations at Foxconn. No automation other than conveyor belts! no robots!

Here is a different approach to estimating labor costs. Foxconn has been reported to have 1,500,000 employees. They make the lion’s share of IOS devices.

Assumptions: One third of Foxconn’s employees work on IOS devices.

Foxconn makes 50,000,000 of the 65,000,000 IOS devices sold in the last quarter.

Average pay is $2.00 per hour.

Each employee works 70 hours per week, 13 weeks per quarter, or 910 jours per month and makes $1800 per quarter.

This calculates out to a total IOS labor cost of $910,000,000 per quarter, or an average cost of $18.20 per device. This is really a pretty WAG, but it is clear that there is plenty of opportunity here even if I am off by a factor of two.

I wonder how much labor would be saved in a truly automated manufacturing plant.

I wonder whether am automated plant could be built and operated in the good old USA at lower costs than Foxconn’s.

I wonder whether this would be a good investment for some of the cash that Apple has been hoarding building up.

Your costs per device aren’t totally off base, although I’d estimate the cost per iOS device was a little closer to $10 than $20.

Fully automating the assembly process would be extremely difficult for various reasons.

To begin with, Apple’s business model involves introducing a new model every year. This means that a highly specialized automated machine may not work on next year’s model – giving you very little time to amortize the investment. Workers can be re-trained much easier than machines can be reconfigured.

Secondly, its much easier to scale production with human workers than it is with automation. If your automated production line has a capacity of 1 million units a year, if you sell 1.5 million you are either going to lose sales, or you are going to need another production line. Its much easier, quicker, and cheaper for Foxconn to recruit and train (or simply lay off) another 10,000 workers than it is to set-up and equip a fully automated line.

Thirdy, Apple operates on a very short lag between the completion of design engineering and releasing the product for mass production. Probably only a couple of months. This isn’t nearly enough time for manufacturing engineers to figure out, and purchase, the custom equipment, jigs, etc. a fully automated process would require.

Lastly, you have to look at the base economics. A highly specialized robot, capable of mimicking fine-detail human hand work, might cost half a million dollars. It also needs maintenance and programming that costs another twenty thousand a year. You could pay the salaries and benefits of half a dozen Foxconn workers, at current pay scales, pretty much indefinitely from the investment earnings of that same half million.

genkihito

Intel is a good case study in constant retooling of existing manufacturing plants. I used to make CAD software and we were trying to get their business. I don’t know the numbers, but I think a similar model should be possible for Apple. Intel doesn’t have a choice, obviously humans can’t make processors because they are too small.

Davel

Yes, but the design is in the computer. They etch the lines in the silicon. You just need to program it. Of course ere are layers and such, but I expect the general model is fairly uniform.

When they change the width of the etchings or some other systemic process than things need to change.

And that happens every 18 months or so, per Moore’s Law, right? That’s pretty constant retooling. And as genkihito notes, even the tiniest of hands can’t fabricate nanoscale circuitry (sorry Foxconn!)

In addition to retooling for die shrinks, semicon manufacturers have to build entirely new facilities when new wafer sizes need to come online (like right now, Intel is building a 450mm wafer fab in Arizona, I believe)

Rajiv

There is licensing cost as well to license FRAND patents, Qualcomm for CDMA etc

Nargg

Those costs are already built into the chips that utilize them. So the licensing cost over and above the hardware is almost nothing. And that’s in the iOS part too, which Apple already paid for.

Tatil

Some of the licensing costs are probably included (bundled with) the chips, so the price estimate from iSuppli etc. may already include them.

Horace, whilst those 4 items certainly are major contributors to the cost of an iPhone for Apple, they are no where near all of them. Surely Apple has to factor in costs like R&D, hardware design, software development, customer support and software maintenance, lawsuits etc.

And what about the cost of iCloud and Siri? I mean to bring Siri to the 4S they reportedly paid about $200m to buy the company that developed the tech and they have to recoup that somewhere in the products they sell. As for iCloud, Apple has to cover the costs of building and maintaining its data centres. Both are free services after all.

iPhone BOM is $150 and assembly cost is $10. Apple can pay assembly $40, workers (currently slaves) can work 40hr/week instead of 80hr/week and they can be paid $400/month instead of $200/month, with margin for much better food, housing, healthcare and more. Apple makes disgustingly large profits on the iPhone. They hide all that money somewhere between China and the USA/Europe as Apple totally lies about the actual margins, they just care to amass mountains of cash off shore and not have to pay taxes on it in any of USA or European countries.

jawbroken

Ah, your new conspiracy theory is fraudulent accounting because you made up some numbers and they didn’t equal Apple’s reported numbers. Interesting.

Where does AAPL tell you how much profit they make on the iPhone? They don’t. The iPhone is the cheapest high-end phone in terms of BOM. Galaxy Nexus, Galaxy S2, Galaxy Note all are much better hardware. The iPhone BOM is $150 Apple pays suppliers nothing in exchange for bulk.

jawbroken

You’re the one suggesting that they lie about margins, so your question is deeply confusing to me.

It’s called creative accounting, something Apple has been doing for the past 12 years, partly to hype up the stock at every single quarter regardless of actual market share, performance and partly to escape paying taxes.

jawbroken

So on one hand they’re pretending that they earn less money than they actually are, but on the other they’re doing “creative accounting” to hype their stock up. Yeah, that makes a lot of sense, investors love lower margins/profits.

Anonymous

Who says they’re better hardware? Do you have a source for any of your ramblings, or are we just supposed to believe everything you pull out of your ass as a given?

The most expensive component in the BOM for any smartphone should be the display. I would find it unrealistic that the Apple retina display (with its unique and very high resolution) is cheaper than most other smartphone screens.

Super AMOLED Plus/HD is much much more expensive than the 18-month old tiny iPhone retina LCD display. Also the processors, memory bandwidth, connectors and other aspects of the materials are better on most high-end Android devices, ergo Android devices are better hardware.

Tatil

Inefficient software requiring more memory or CPU power is nothing new in the area of computers. It is the combination that counts.

The high resolutions touted by Android manufacturers are misleading at best, when their definition has fewer than one blue, green and red dot each per pixel, as the difference is quite visible in real life.

Anonymous

Does idoles employing your “slaves” in China too? How much do they pay?

Good point, AAPL is the single company profiting the most on Chinese slavery, ergo AAPL should pay nothing for the slaves assembling the iPhone.

Anonymous

Your inaccurate use of the word “slavery” his histrionic at best. If you really have a problem with Chinese-made products, don’t buy them. It’s almost guaranteed you own things that were made in much worse conditions than those that exist at Foxconn.

Good point, because we all use stuff made in China, AAPL cannot be held responsible. Regardless if Apple has become the worlds most valuable company by profiting the absolute most on this practice. Good point. The USA/Bush cannot be to blame for the wars in Iraq and Afghanistan because other countries participated. McDonalds cannot be held responsible for americans being so fat because people also eat other food.

Jon T

Precisely why it makes you so hypocritical. You are offended at people being lifted out of poverty in China because they aren’t treated quite well enough for your liking. And ignoring the consequences of your demands (keeping more people in poverty for longer). And you are probably also outraged at Assad bombing citizens in Homs. Nothing will be done about the latter, because ‘you’ successfully took such offence at the West taking up arms agains previous versions of Assad – as in Hussein and the Taliban/Al Qaeda.

Consider though that Foxconn has raised worker wagers several times in the past couple of years, in each instance right around the time that a public outcry was building about its labor practices. This points to a couple of things – one, that consumers making a public stink has actually helped Foxconn workers materially, and two, that Foxconn/Apple have room in their business model to compensate workers better if needed. In the Nightline report, a Foxconn exec says without batting an eye that worker wages could actually be doubled, which leads me to believe that there’s still a lot of room in the business model to pay labor a lot more and still profit handsomely from selling iPhones etc. PS I don’t understand your references to taking up arms against different countries or what they have to do with the subject at hand.

Anonymous

Can FedEx or Boing or Mcdonald raise their employees wages? Sure! What about Am. Ex? Bank of America? Exxon/Chevron (record profits last few Qrtr’s)?
Very easy to play Vegas with someone’s elses money!

Davel

Apple pays a higher tax rate than Google or Microsoft. If you want to take a company over the coals for evading taxes, Apple is a much better citizen than its peers.

Not really. The still gaping loophole in the old internal transfer pricing tax dodge only works with IP derived revenues, not hardware sales. Since virtually all of Google and Microsoft’s revenues are software or IP-driven, they have a much greater ability to dodge taxes by transferring profits through tax havens. Apple’s ability to do so is much more limited. But they surely must be doing it as they have a huge pile of cash outside the US, just like MSFT, Google, other large software and pharma companies.

LarryVandemeer

What are you talking about?? Apple has a better off shore tax shelter than ever Romney… does lying to yourself make you sleep better at night???

Anonymous

Bullshit. Pure, unadulterated bullshit. You are reading tabloids and regurgitating.

Apple is big, but they are not as big as China. Apple does not own factories in China. Apple does not employ the workers in question.

Apple paid 25% tax in the US last year. Much, much higher than Google’s 6%.

Good point Doey. Apple does not use outsourcing and outsourcing does not put any of the blame on the company using that practice. It’s perfectly okay for Apple to pay their intermediaries shit margins so they cannot afford anything else than treating their workers as slaves, employing underaged people, overworking them, forbidding week-ends, holidays, sure enough man, Apple has no blame. Apple is perfect. AAPL makes the most profit of any company in the world on this practice. For example Google makes 98% of its money on advertising mostly outside of China, Microsoft makes 98% of its money selling software, Apple makes money exploiting Chinese slaves.

Jon T

Apple sets a considerably better example, than any of it’s peers in corporate responsibility. You are attacking the wrong entity, and showing foolishness in so doing.

Canucker

While I am sure Apple does everything it can to maximize its profits, that is true of most companies and is an obligation to shareholders (I presume Charbax holds no Apple shares, which might explain his bitterness). Apple is in the spotlight, deservedly, as it is the trend setter and most successful of all of the technology companies. ABC didn’t bother doing an expose on Dell or the other no-name companies who contract with the exact same assemblers as Apple because Apple is in the limelight.

Anonymous

Repeating yourself does not make you right. Please read some of the comments to your post before you rumbels on. Thanks

I have a theory that the iPhone 4 was designed to be manufactured for over four years, with extremely low manufacturing costs after year two. Apple’s strategy for selling phones at the low end appears to be to continue manufacturing obsolete models, and I suspect the iPhone 4 was designed with that in mind. That is to say: pay for expensive factories with the products produced in years 1 & 2, in order to have exceptionally low manufacturing costs thereafter. But the high number of manual manufacturing steps works against this theory.

Don’t assume that engineering costs are elsewhere, they may be amortized in the individual pieces of each phone over the first so many units. I’ve seen it done both ways

The other thing you are missing is tooling costs, again amortized over the useful life of the tool or over some assumed volume numbers. These devices have millions of dollars of tools (plastic molds, CNC machines, etc, etc ) that have to be paid for. Generally tooling costs are put into COGS, so that is a possibility. (either Fox is charging apple for their tooling costs in their assembly price or Apple owns the tools and takes them directly to COGS)

Typically amortization is excluded because the OEM does not own the equipment/tooling. However, as Apple has nearly $8 billion in CapEx per year and much of that is probably applied to machinery and process equipment then indeed amortization may explain a lot of the gap in COGS.

Big fan of asymco.
Step 1 should be coming up with a ratio of total man hours Vs Machine hours.
This ratio is unknown.

Total ratio will be based on man vs machine time spend on each of 141 step.
Each step will have different ratio.
Some step will have 100% man time 0 machine time
Some will have 95% machine time 5% man time to load/unload.
Depending upon the cycle time of the machine, the person could be working on next or previous phone.

Also note that some time labor is distributed. in a typical 3 cell layout, one labor can operate 3 machines if cycle time permits.

I do believe that using flexible manufacturing cells and innovative layout, gravity chutes, it is possible for me to believe $8 / iphone labor quoted by iSupply or someone.

Unit labour cost for Foxconn are certainly higher than the actual salary, I’d say at least 30% (not that they pay much in benefits, sick pay etc. but I am sure there are some social charges payable to the state and some overhead). Plus unless Apple is paying for all equipment, manufacturing costs will include the depreciation for all equipment and buildings that Foxconn needs, plus consumables including energy, plus the profit margin of Foxconn.

When people ask why the iPhone is more expensive than the iPod touch do they mean ‘Why can they charge more?’ or do they mean ‘Why are net costs of it lower?’, because I am not sure we know how much cheaper the iPod touch is for Apple to produce.

When people ask why the iPhone is more expensive than the iPod touch do they mean ‘Why can they charge more?’ or do they mean ‘Why are net costs of it lower?’, because I am not sure we know how much cheaper the iPod touch is for Apple to produce.

“The high level (141 steps) of human interaction in the process could be automated however, the fact that it isn’t implies that the cost of automation would be higher and the flexibility of the automated process would be lower. It’s much more likely that the process is a mixture of labor and robot intensive sub-processes.”

I’m not sure that can be implied. Two points:

1) Remember, the volume ramp to the iPhone 4 was extremely steep, so Apple would have needed to have concluded automation would be cheaper back during the iPhone 4 design phase based on 3G/3GS sales volumes. The 4/4S may show that automation is cost-effective, but that won’t appear until the 5 design as these devices need to be designed with the manufacturing process in mind – it’s not an afterthought but a design consideration.
2) Running parallel to that trend, the technical abilities of automation for small item assembly are still being developed, and their costs coming down. Further, Apple’s volume is so high that ramping up production of the automation equipment would itself present a fairly large challenge, particularly given Apple’s sensitivity to time-to-market. If the automation equipment is flexible and reprogrammable (and likely expensive), that minimizes the impact as moving from iPhone 4 to 5 to 6 might require little more than a reprogramming and restaging, but if it’s specialized to a given task and needs to be replaced with a new piece of equipment, that only serves to delay the introduction of a product as Apple waits on the manufacturing equipment to be manufactured. How many hundreds of thousands of robots would Apple need? Probably more than are made annually right now.

What I’m wondering is how much longer Apple can charge it’s egregiously high markups for memory: its prices for both DRAM and flash are extremely high. I wonder if the answer is that at present they’re supply constrained (i.e., if they cut prices the increased demand for high capacity devices would cause them to be able to produce fewer devices.?

Apple did comment on the 6000 phones per day # as being from 2 separate
12 hour shifts rather than from one worker. Each worker handles 3000 operations per day over a 12 hour day. That works out to 250 per hour or about 4 per minute. 15 second operations 3000 time a day sounds pretty brutal any way you cut it. I am not saying this as some kind of attempt to condemn Apple. This is how the world is right now. I do have a suggestion for change.
Apple could look at this the same way Henry Ford did. If Apple raises Foxconn’s employees pay by 25% per year for the next 5 years then at the end of that time they would have raised their pay by 3 fold or $4 an hour. This would possibly give the workers the purchasing power to buy Apple products of the prior generation (at $300 or 50 hours of work). Other manufacturers would be forced to raise wages to match Foxconn or move production offshore to some poorer country in order to find workers for their lower wages. The high tech production would probably stay in the near term because of the trained labor force and the network effects which would keep sub manufacturers on site. This would help raise China’s workforce up to middle class in 5 to 10 years. The workers could then become consumers of Apple products. Henry Ford doubled his pay scale in one shot because of his bad reputation as an employer. He correctly calculated that his and his competitors employees would become his future customers.

Anonymous

When a totally new product,
process or other innovation is suggested it is usually met with a list of
reasons why it would not work. To most
people this is a reason to kill it. To
the truly creative people it becomes a list of things to solve to make it
work. This is the soul of Apple. This is why Apple is leading the entire
computer, communications and consumer electronics industries to new highs. This is what separates them from all of their
competitors who are left with nothing better to do than imitate Apple. Because the need is there I am confident that Apple is hard at work figuring out how to automate the iProduct manufacturing process to make products at lower cost and even better quality, and hopefully make it possible to bring at least a portion of of their manufacturing back to the USA.

Anonymous

Sorry for the strange formatting. I wrote this in MS Word, copied it and pasted it. Back to Pages.

Pburton

Westech , you are 100% correct , if we (the USA) want to bring back this type of business , we must become the Leader Again in manufacturing-not just putting 100,000 people in a line – but with 8,000 working in a smart plant, and yes it can be done at a competitive cost and flexibility to allow for in line product changes . All of these people who keep talking about “we can’t compete with the rest of the world” , even the government , says “forget about these jobs -there gone” – this is BS – We MUST build a manufacturing core that meets these demands.- What is going to happen next- these countries are going to invest into automation – than labor won’t be the problem- but we won’t be in the game and there will less reason for companies to invest here.

Have we forgot – the USA built TV’s , Cars, Phones,Appliances you name it we made it for the world – and now we can’t ?-
Please- if you want to tell me that things have changed- people won’t work like that today- or all of the reasons why you don’t think it is possible –
Don’t bother – We need people who understand that we MUST and WE CAN if we are going to return this country to a World Leader.

The objections I have heard all sound like ‘Apple will take years to learn the phone business’, and Apple will never get the music publishers to go along with this’, and ‘Tablets are not new. There is no market for them’.

Automated electronic fabrication is not new. I have seen complex circuit boards with many different components being made without human hands, easily programmed for product changes. I don’t know how many different parts there are in an iPhone or an iPad, and how many steps it would take to assemble them, so I have little idea of how many machines would be needed for a line. A key to success may be designing the product for automatic assembly at the start.

khizar_07

The pioneers of yesterday were very intelligent, “If I had asked people what they wanted, they would have said faster horses. Instead, I worked incredibly hard to educate my audience and persuade them. In real life, the customer is not always right.” – Henry Ford.
The people that have taken over and their kids are very stupid. Making electric cars when far more economical means are feasible! Even after failure they defend their stupid children because their kids are their future breadwinners!

Captain Obvious

“I find many of the quotes on the internet to be of dubious origin”
– Abraham Lincoln, 16th President of the United States

Guest

Do you realize that Samsung employs more people in USA than Apple? I’m not a fan or hater of any tech companies but this unconditional Apple love is just disgusting.

Apple is not the pioneer nor leader in anything. All they do is sell a product through marketing making people it is great, Non of the Apple products sold today are market leaders in terms of tech. They try to stop any other company that they think is a threat to them though litigation. They are slowing down the whole industry and are abusing the patent system. They have lost their creativeness that saw them re imagine the smartphone in 2007. They have become a stagnant giant who gets by just being mediocre now.

You will be surprised how little Apple really innovates. Simply go to youtube and search for ‘Has Apple really invented anything’

Guest

Do you realize that Samsung employs more people in USA than Apple? I’m not a fan or hater of any tech companies but this unconditional Apple love is just disgusting.

Apple is not the pioneer nor leader in anything. All they do is sell a product through marketing making people it is great, Non of the Apple products sold today are market leaders in terms of tech. They try to stop any other company that they think is a threat to them though litigation. They are slowing down the whole industry and are abusing the patent system. They have lost their creativeness that saw them re imagine the smartphone in 2007. They have become a stagnant giant who gets by just being mediocre now.

You will be surprised how little Apple really innovates. Simply go to youtube and search for ‘Has Apple really invented anything’

Guest

Do you realize that Samsung employs more people in USA than Apple? I’m not a fan or hater of any tech companies but this unconditional Apple love is just disgusting.

Apple is not the pioneer nor leader in anything. All they do is sell a product through marketing making people it is great, Non of the Apple products sold today are market leaders in terms of tech. They try to stop any other company that they think is a threat to them though litigation. They are slowing down the whole industry and are abusing the patent system. They have lost their creativeness that saw them re imagine the smartphone in 2007. They have become a stagnant giant who gets by just being mediocre now.

You will be surprised how little Apple really innovates. Simply go to youtube and search for ‘Has Apple really invented anything’

Do you realize that Samsung employs more people in USA than Apple? I’m not a fan or hater of any tech companies but this unconditional Apple love is just disgusting.
Apple is not the pioneer nor leader in anything. All they do is sell a product through marketing making people believe it is great, Non of the Apple products sold today are market leaders in terms of tech. They try to stop any other company that they think is a threat to them though litigation. They are slowing down the whole industry and are abusing the patent system. They have lost their creativeness that saw them re imagine the smartphone in 2007. They have become a stagnant giant who gets by just being mediocre now.
You will be surprised how little Apple really innovates. Simply go to youtube and search for ‘Has Apple really invented anything’

khizar_07

It has actually, the Art of spreading bullshit!
It’s a pioneer in that field!

Does the BOM include IP that is licensed on a per-phone basis? I could imagine that adding up to perhaps $20 or even more. As I understand it, Apple does not disclose much of the IP it has licensed except when unusual circumstances (like lawsuits) require this.

People have suggested this in the context of specific chips, and that may be true for the CPU, GPU, GPS, WiFi, and cellular IP; but there is more to an iPhone than that — specific IP at the Apple/iOS level relating to touch and gestures, maybe to voice, maybe to all sorts of stuff.

IP licensing varies widely in how it’s accounted for. Some of it is included in the price of components, some of it is paid separately. I think the amount that has to be paid directly is likely to be less than $20 per phone.

I understand that” R&D (engineering and development) and Sales, General and Administrative (e.g. Marketing) costs are not part of this cost structure” but they must come out of the $293 per phone, because the way you came up with that number, the rest of the average sale price is profit. If you assume $30 for manufacturing costs, you need not account for $60 in transportation and warrantee, because from that $60 you also need to account for R&D, sales and administration.

PS Where does the cost of iCloud go? Administration? Warrantee (as a post sale user service)?

Operating profit is different from net profit and from gross margin. The accounting principles are perhaps non-intuitive but they do make sense on a certain level.
I’ll write a post showing all the costs and how they are allocated.

Is there any estimation just for transportation costs excluding warranty?

khizar_07

So you have to pay an extra $93 dollars for a crappy looking home screen and user interface!

Lisa

No way this BOM costs $200. I buy PCBA’s, touch screens, and all electronics for a living. If they were selling 20/year, MAYBE. They’re selling hundreds of thousands, if not millions. Their BOM cost is closer to $20 or less. These things come in giant cargo containers from Asia, consolidated delivery that’s roughly $1200-$2K, depending on container size and dedication for freight. Warehousing? They are sold in stores across the US, so their storage fee’s, are basically retail rent/lease spaces. You’re paying for engineering expenses when you buy your phone, period.

StuartEe

This article is written by someone with zero knowledge of manufacturing.

Apple ship 100,000,000 iPhones each year.

Apple can go to any chip manufacturer and say, hey we want to buy 100 million units of chip X, you catalogue says chip X costs $100, we want to pay $8.50

Can you sell us 100 million of them for $850 million?

And the manufacturer says, if you pay $1 billion I can provide 10 million chips per month… forever.